Working on buying SMB w/ $1.5M EBITDA. As I work through financing, it’s pretty clear that the $1.5-2M of EBITDA range (give or take) is a sweet spot for SMB buyers b/c it’s an “in between” size for usual buyers. Too big for “job buyers” and too small for other folks (PE, SBIC).
For “job buyers” … after adding $250k deal expenses (SBA fee, lawyer, QofE, etc) and a $250k working capital cushion, the project cost is $6.5M. Subtract $650k seller note and $5M max SBA loan and the deal requires an $850k cash injection.
$850k is doable for some buyers, esp self-funded searchers w/ investors ready to write checks, but certainly not easy for “leave corporate world, buy a job” folks. Plus, SBA is super tight post COVID w/ max size loans ($5M) that have big airballs -> bigger cash injections needed.
For ind. sponsors relying on the senior (bank) cash flow non-recourse lending and mezz debt/SBIC communities, there are huge issues. The sr. cash flow market seems quasi-frozen for sub $2M EBITDA SMB buyers that don’t have existing lender relationships.
Mezz/SBIC shops are really hesitant to do sub $2M EBITDA deals for a host of reasons (risk, check size, bandwidth, etc). So that leaves good old-fashioned equity. But “too much” equity = lower returns for sponsor deals w/ typical structures (transaction & quick flip incentives).
LMM PE firms can certainly get these deals done, but (anecdotally) they’ve retreated back “up market." Plus, they are working on helping their companies recover from COVID. These smaller deals are probably solid add-ons, but is that the focus right now?
So, for SMB buyers w/ equity bench to get these deals done creatively/quickly, there may be less competition at the moment. Does that mean lower valuations + more buyer-friendly terms? Maybe now, maybe on the horizon. Would love to hear what others are experiencing...
